The Real Question for the $63 Billion AbbVie-Allergan Acquisition

I know my brain doesn’t work quite right. I wouldn’t be writing Great Stuff if it did.

Today, I’m left with a burning question on AbbVie’s $63 billion cash and stock acquisition of Allergan.

It’s not about the viability of the combined company. Both AbbVie Inc. (NYSE: ABBV) and Allergan PLC (NYSE: AGN) face serious questions about how they move forward as generics and biosimilars begin to threaten their blockbuster drugs.

It’s not about AbbVie’s promise to “deliver on our mission to patients and shareholders” or to “achieve unique and complementary strategic objectives” … whatever that means.

The Takeaway:

OK, back to reality. I make fun, but Mr. Raymond makes a solid point … albeit with questionable math involving turkeys. Still, it adequately conveys the absurdity of the buyout.

AbbVie makes the biggest drug in the world by revenue: Humira. Humira treats a wide range of aliments including psoriasis, arthritis, Crohn’s disease, ulcerative colitis … the list is truly staggering.

But biosimilar drugs are beginning to hit the market in Europe now. Humira will face a similar fate in the U.S. in 2023.

Allergan faces a similar fate with Botox, a drug/treatment that made up about 24% of the company’s total net revenue in the first quarter of this year. What’s more, Allergan was facing so much potential pressure from biosimilar drugs that analysts were speculating the company would split up.

So, you have one company struggling with competition buying another company in a similar situation. Can a combined AbbVie/Allergan “achieve unique and complementary strategic objectives”?

That remains to be seen. Investors should hold off for now on investing in the combined company — no matter how many turkeys they attempt to combine.

By the way, if you want the real inside scoop on which pharmaceutical or biotechnology companies to invest in, click here.

The Good: Get Yer Grub

People need to eat. Investors need to make money. Grubhub Inc. (NYSE: GRUB) combines both in a nice, tidy package.

Hungry, but don’t want to leave your couch or take a break from the game? Grubhub has you covered. And, apparently, it’s delivering better than its competitors.

Citi Research analyst Mark May upgraded the stock to buy this morning with a $91 price target. That’s nearly 20% above GRUB’s current price.

Now, May got into a lot of analyst jargon such as “driver efficiencies” and “ops & support margin” and “4Q19 EBITDA/order guidance.”

Basically what he’s trying to say is that Grubhub will hit its earnings targets, it will continue to bring in more money and the company is doing this better than its peers.

I don’t know why that’s so hard to say. But I guess “buy” and “$91 price target” do sum things up nicely.

The Bad: Downgradeified

One of the hottest stocks of 2019 was just given a reality check. Shares of Shopify Inc. (NYSE: SHOP) were smacked with a downgrade to neutral this morning at Wedbush.

Adding “ify” to the end of a capitalist cornerstone will only get you so far, apparently.

The ratings and research firm also cut its price target to $270, below SHOP’s current price.

According to Wedbush, it really likes Shopify, its prospects and the strong growth potential in the online retail market. However, SHOP shares are overvalued, it says.

This kind of downgrade was coming eventually. SHOP is up more than 116% so far this year. But investors shouldn’t fret too much. Shopify is still averaging revenue growth of more than 40% a quarter.

Car-Buying Karma With CarMax

It’s not the buying, per se — I actually like new cars. It’s the whole entire process.

The back and forth on the price. “Checking” with the manager. Adding new “features” at the end such as warranties, fabric protection and alien repellant. The list goes on.

When my wife and I bought our first car together, we arrived at the dealership with a budget in mind at 8 a.m. We didn’t leave until after 6 p.m. that day.

It’s worse than a root canal. I’d rather be buried up to my neck and covered in honey near a fire ant mound than buy another car the “traditional” way.

But CarMax Inc. (NYSE: KMX) … that’s different. One price, no haggling — either you can afford the car or you can’t. Period.

In and out in less than two hours. That’s worth investing in.

My family has bought our last three vehicles from CarMax, and we won’t go anywhere else. It’s just a waste of time.

And I’m not the only one who thinks so. In the first quarter of 2019, CarMax saw a 9.5% jump in comparable store sales, well outpacing Wall Street’s expectations for just 5% growth.

Part of the allure for repeat customers is the online shopping component. You can find the exact car for the exact price you want before you even walk onto the lot. This is a dream occurrence for anyone who’s bought cars from a dealer or anywhere else before.

It’s been a boon to CarMax’s revenue and earnings as well. Earnings growth has averaged roughly 6% in the past year, while revenue is projected to grow by the same rate for the next two years.

What’s more, despite the “retail apocalypse” and massive store closures in the retail space, CarMax is opening 14 new lots this year.

The combination of online shopping and easy car buying will continue to disrupt a market that seriously needs more alternatives. But CarMax is really the only game out there right now, meaning that the company’s growth potential is considerable.

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